Themes from 2005 — Dick Green of Briefing.com

Dick Green, President of Briefing.com, is an award-winning writer, picked this year by Smart Money as one of the top 30 market movers.

His Summary of 2005 highlights some key themes, and he then offers lessons from each.  (You might need a subscription for some articles, but you can find many of them here).

Dick draws some lessons from each theme.  I agree with the 2005 summary, and my own market outlook will also build on the 2005 events.

Here are the themes:

1) The U.S. economy proved extremely resilient to exogenous shocks.

2) Earnings growth was very strong and corporate balance sheets shined.

3) Value returned to the overall stock market despite rising interest rates.

4) Inflation remained surprisingly constrained.

5) Pervasive pessimism persisted throughout the year.

Dick (like me, Chicago-based) sees misplaced fears and pessimism, especially from "journalists based in the slow-growth Northeast.  He warns investors not to get caught up in the fashion of the moment or specific data points.

It is great advice.

Some Strong Support for Barry from Studies

There is very strong support for the yield curve association, and I’ll link to some sources below.  Barry’s analysis is more carefully qualified than that of most of the talking heads on CNBC.  Until now, I have always believed in the yield curve as an indicator, and I well know the peril in asking whether "this time is different."  That is where the causal modeling comes in. To review, here is the initial post:

Link: Inverted Yield Curve: Its different this time (not).

The yield curve, as measured by the ratio between the 10 and 2 year treasuries, is merely a few ticks away from inverting. This is something worth paying close attention to. What’s the significance of an Inversion? It reflects a decreasing demand for …

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Thinking clearly about the yield curve

Barry is like the farmer who thought the sun would no longer rise after his rooster died.  He has observed a correlation and has inferred causation.  The yield curve is an indicator of something, not a cause.  Ask yourself this question:  Would U.S. economic prospects be higher if Asian banks were less willing to buy our bonds?

I’ll give a more complete explanation, but first look at the complete article.

Link: Inverted Yield Curve: Its different this time (not).

The yield curve, as measured by the ratio between the 10 and 2 year treasuries, is merely a few ticks away from inverting. This is something worth paying close attention to. What’s the significance of an Inversion? It reflects a decreasing demand for …

Continue reading…

You, too, can be a Contrarian

How many strategists and managers can be contrarian?  Why does everyone want to be one?

As with many principles, the basic idea is easiest to understand by looking at extremes.  At market bottoms (or bottoms in specific stocks, commodities, etc.) no one wants to buy.  This is a terrific opportunity because the selling is over.  Ownership has moved into strong hands.  There is no one left to sell, so the stock is ready to rise.

At tops it is the opposite.  Think of the famous story about Joe Kennedy and the shoeshine boy who offered him some stock advice.  Kennedy famously sold his holdings, avoiding the ’29 crash, since he realized that there was no one left to buy.  [I had a close eye on a hotel parking attendant in Denver a couple of weeks ago.  He headed for the business center, so I watched to see if he was planning a little online trading.  PHEW!  He was just checking his email.  Don’t laugh.  In 1999 I saw CNBC on in parking garages and assorted retail establishments with everyone checking quotes.]

So every hedge fund manager or strategist wants to be a contrarian, since that shows there is a big opportunity.  You just have to find something where you can contend that everyone else is wrong and you have a lot of edge.

There is a lot of interest in this topic right now, so I plan a series of posts looking at a framework for analysis, some examples of those who are taking contrary positions, a look at some of the indicators and why they are broken right now, and finally, my suggestion for the best contrarian trade.

This Hedge Fund Strategy Ain’t Overcrowded

Everyone wants to be a contrarian.  Here is an interesting suggestion that a hedge fund can be contrary by selling stocks short.  The evidence here is not very convincing, since even those hedge funds that are not labeled as "short only" maintain substantial short positions and use leverage.

But first, take a look at the article.

Link: This Hedge Fund Strategy Ain’t Overcrowded.

We’ve been silently skeptical of claims that hedge funds will run out of ideas. The reason is that a hedge fund can technically do anything it wants. It doesn’t have to do traditonal long-short arbitrage, or whatever is considered standard….

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